While the U.S. industrial real estate markets are expected to continue to shift as they deal with a massive amount of new supply coming to the market, several analysts are expecting the difficult conditions to be temporary thanks in large part to strong demand.
The past few years has seen unprecedented leasing and investment demand that pushed vacancy rates to record lows. Entering 2024, Colliers National Director of Industrial Research Craig Hurvitz reported that the U.S. industrial vacancy rate increased during all four quarters of 2023, climbing 195 basis points to 5.6%—the highest since 2016.
Record new supply nearly tripled net absorption for the year as demand normalized to 2019 levels. However, he noted that while industrial vacancy rates will rise this year, construction starts have rapidly dropped off recently and the result of the quickly contracting construction pipeline will result in the equilibrium between supply and demand returning by the end of this year.
“Industrial vacancy rates are poised to rise further through much of 2024 in all regions and most markets as new supply outstrips demand,” Hurvitz wrote in his recent report entitled “U.S. Industrial Market to Evolve, Return to Equilibrium in 2024.” “The vacancy rate is forecast to stabilize at around 6.5% during the second half of 2024, a functional rate slightly above its 15-year average of 6.2%. In markets receiving a significant amount of new product relative to the overall industrial inventory, vacancy may exceed 10%; it will remain below 5% in markets with less development due to geographical constraints or other factors,” he stated.
In terms of rents in 2024, Hurvitz noted that average lease rates exceeded 15% year-over-year growth in many markets. “While rent growth may pause in some markets where rates got a bit out of hand, more rent growth is forecast in most markets in 2024, although at a more tempered pace, closer to historical averages of between 4% and 8%,” he stated.
Hurvitz predicts strong performances in 2024 in data center, cold storage and third-party logistics (3PL) sectors.
For the manufacturing sector, Hurvitz expects a mixed bag this year. “While speculative development of warehouse and distribution facilities is quickly dropping, manufacturing construction spending has never been higher. Manufacturing reshoring has accelerated impressively during the past two years with the CHIPS Act, primarily catalyzed by rising tensions with China and supply chain concerns,” he said. “While most development has been concentrated in semiconductor and electric vehicle battery facilities, it is also increasing for food and beverage processing, chemicals, and plastics factories.”
Five Emerging Global Trends in 2024 That Could Lead to Next Boom
While most of the business community is focused on the Federal Reserve Board’s inflation policy and when it may institute interest rate cuts later this year, a recent article in Supply Chain Management Review suggests that the “current economic malaise could lead to an (economic) boom over the next few years.”
Michael J. Gravier, Ph.D., C.T.L., chair of the Department of Marketing and professor of Marketing and Global Supply Chain Management at Bryant University in Smithfield, RI, theorized that the current global environment is reminiscent of the 1990s.
“We are in another era not unlike the early post-Cold War years. We are now seeing the same trends being adapted to the current global environment, and I predict that just like the 1990s started with a whimper that turned into an economic boom, we will see this current economic malaise turn into a boom over the next few years,” he stated.
The five trends Prof. Gravier pointed to as a precursor to a possible economic boom are: re-alignment of trade blocks, more vertical integration, political activism, labor scarcity and technology redefining work ethics.
In reference to the technology trend, he noted that “AI, automation, and other technologies promise to change the productivity equation. Combined with changes to labor availability, corporations find themselves redefining their relationship with workers. A lot of managers no longer know how to treat workers, and having technology—whether AI, WFH, or other systems—acting as an intermediary has led to some dehumanizing of some management-labor relationships.”
He continued, “Work from home is still a battleground between management and workers, with perhaps the most telling characteristic being the lack of recognition in most policies about which kinds of work are more effectively done in a WFH setting. Corporations are slowly getting back to investing in education and training as effective multipliers of labor productivity. In addition to the drive to increase productivity, many new technologies will require reskilling of the labor force on a continuing basis. Once the pay issue is settled, few policies improve retention as well as training and education—and these programs will also evolve ethical standards for both workers and management.”
Prof. Gravier concluded his article with the following prediction for this year and beyond: “2024 will prove challenging for companies that don’t take an assertive stand. History shows us that fortune favors the bold, and in an uncertain environment, you are more often successful by rallying your forces than by waiting to react. Boldness might be the best approach in the year to come.”
